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Stocks and shares ISAs - Investment ISAs

You don't have to save cash in an Individual Savings Account (ISA). You can also invest in stocks and shares to watch your money grow. Read our guide to learn more about stocks and shares ISAs
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Guide - Top tips for getting the most from your cash ISA
Top tips for getting the most from your cash ISA

An ISA, also known as an Individual Savings Account, is a way of saving for the future in a tax-efficient way. Stocks and Shares ISAs, or Investment ISAs, were created by the government to encourage savings and investment in the stock market. Some people refer to them as either stocks ISAs or shares ISAs.

Stocks and shares ISAs are different to cash ISAs because your money is invested, not just put into a savings pot.

You don't pay tax on interest on cash in an ISA and you don't pay income or capital gains from investments in an ISA.

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Why do I need a Stocks and Shares ISA?

If you are looking to invest and save your money for the long term, then a Stocks & Shares ISA might be right for you. One of the advantages of putting money into shares and other stock market investments is that it can help protect your finances against the eroding effects of inflation.

Inflation refers to the increase in prices and the corresponding fall in the real purchasing power of your cash. The main UK measurement is The Consumer Prices Index. The CPI all goods index rose by 12.9% in the 12 months to August 2022, down from 13.5% in July.

This means that your cash in the bank or in a savings account will enable you to buy less as the cost of goods and services rises faster than your savings. The benefit of having some of your savings in the stock market means that your money could grow above the rate of inflation over the medium to long term, whereas cash tends to lose its value, even in an interest-paying account.

What is the difference between an Investment ISA and a Stocks & Shares ISA?

An Investment ISA is another name for a Stocks and Shares ISA. An Investment ISA not an investment in its own right. It is a tax wrapper that you put around an investment. You buy the shares, funds or bonds that you want to invest in and keep them held within the ISA wrapper. This shields it from some or all of the tax you'd normally have to pay.

Everyone over the age of 16 has a £20,000 ISA allowance in the current tax year of 2022 to 2023. You must be over 18 to get a stocks and shares ISA. Stocks and shares ISAs can include:

  • shares in companies

  • unit trusts and investment funds

  • corporate bonds

  • government bonds

How is a Stocks and Shares ISA tax efficient?

A Stocks & Shares or Investment ISA is a very tax efficient way to save for the future.

No income tax: You do not have to pay any income tax on the growth of the investments in a stocks and shares ISA. But you must keep the investments in the ISA to avoid that tax.

No Capital Gains tax: Capital Gains Tax (CGT) is a tax you pay when you sell an asset that has risen in value. You can buy and sell investments within your ISA and not pay any CGT on the gains you have made.

The tax advantages depend on your personal tax position. Buying share-based investments through ISAs will save you tax if you're a higher rate taxpayer, or are likely to pay CGT. Without the ISA protection, you have to pay CGT on investments over £12,300, the amount known as your annual CGT allowance.

No tax on Dividends: As a higher rate taxpayer with a Stocks and Shares ISA, you do not have to pay the additional 33.75% normally due on dividends, or 39.35% if you are an additional rate taxpayer. The other advantage of an ISA is that if the tax rules change, your savings are protected from any tax increases, such as a change or reduction in the Dividend Allowance.

What is the Dividend Allowance?

You may receive dividends if a company you have invested in makes a profit. There is an allowance available to all adults, known as the Dividend Allowance, which is £2,000 per tax year. This applies to the current 2022 to 2023 tax year. So, if your dividends do not exceed £2,000, you will not have to pay income tax or capital gains tax even if your dividends are received outside an ISA. As a basic rate taxpayer whose dividends total more than £2,000, you'll be taxed 8.75%.

How much tax you pay on dividends above the Dividend Allowance depends on your Income tax band. From April 2022 tax on dividend income outside ISAs increased by 1.25% to help support the NHS and social care. If you earn more than £2,000 a year in dividends, you currently pay: Basic rate taxpayer: 8.75% Higher rate taxpayer: 33.75% Additional rate taxpayer: 39.35%

The advantage of a Stocks and Shares ISA is that when the government increases the tax rate on dividend payments, the dividends within your ISA will not be subject to any form of tax, even if they are above the £2,000 threshold.

Find out more about investment and tax

How much can I invest in a stocks and shares ISA?

Your annual allowance for a stocks and shares ISA in 2022 to 2023 is £20,000, unchanged from the previous year. You can split your allowance between a cash ISA, stocks and shares ISA and a Lifetime ISA.

Any gains you make on your investment are not counted as part of your stocks and shares ISA allowance. Gains are profits you make from your investments, for example if the value of your holdings rise because the share prices of the company or funds you hold have risen.

For example, if you invested 50% of your ISA allowance (£10,000) and it went up in value, you would still be able to invest the other 50% before the end of the tax year. The gains you made would not reduce the overall amount you can invest.

Can I change investments within my Investment ISA?

You can switch your investments within the Stocks and Shares ISA or transfer them to another provider without it affecting your allowance.

If you sell any shares in your Stocks and Shares ISA, you can reinvest the proceeds in the ISA. They will not count towards your annual allowance either. If you withdraw the proceeds of a share sale you will lose the tax-free benefits.

If you withdraw any cash from the ISA wrapper and decide to reinvest it into that same ISA, it will count as part of your annual ISA allowance. Therefore, once you have committed your money to an ISA it is better to keep it there. Think of it as an investment for the medium to long term, not a place to keep money that you might need in a hurry.

Is a stocks and shares ISA the right investment for me?

A Stocks and Shares ISA does have the potential to deliver higher returns than a cash ISA, especially over the medium to long-term.

But you need to bear in mind that it does not provide the security and easy access of a cash ISA. In fact, you could lose money if your investments perform badly.

As a starting point, you need to consider what you want from your investment and your attitude to risk.

A Stocks and Shares ISA might not be the right thing for you if you:

  • Want your investment to deliver good returns on your savings over a short period (under 5 years)

  • Want to get your capital back, such as when you're saving for a deposit on a house or flat

  • Are risk averse

  • Will need regular access to your savings

Stock market investments need to be viewed as a medium to long-term investment. You should be comfortable not accessing your money for at least five years in order to ride out the ups and downs of the market.

You need to be prepared to take a risk with your money because there is not guarantee you'll get out what you put in. On the other hand, your money could grow and perform better than a cash investment, and give you some protection from the effects of inflation.

How can I minimise the risk of a stocks and shares ISA?

Different funds offer different levels of risk and return.

If you have decided you're prepared to take a risk, you can match your ISA choice to that level of risk. You can also diversify to spread your risk or choose a collective investment.

Stocks and Shares ISA investments do not have to be limited to shares either. Many collective funds invest in bonds and guilds, and even commercial property. It is also possible to choose a fund according to your ethical or environmental beliefs.

 Find out more about investing and risk.

Are you earning enough interest?

It could be time to find and compare stocks and shares ISAs